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Australian retail loses its fizz, trade surplus shrinks

[SYDNEY] Australian retail sales braked in July as consumers, burdened by stagnant wages and rising utility bills, sharply cut back their spending at department stores and on household goods.

Australian Bureau of Statistics' (ABS) data published on Thursday showed retail sales were flat in July, upsetting expectations for a 0.3 per cent increase after a solid 1.8 per cent gain in sales the June quarter.

The Reserve Bank of Australia (RBA) has long feared ballooning debt in the red-hot property sector was pinching consumers' ability to spend elsewhere in the economy.

Analysts had questioned the recent momentum in retail and vehicle sales, given mortgage debt is accelerating faster than incomes.

Market voices on:

"This (spending momentum) is unlikely to continue as the wealth effects flowing from property price gains in Sydney and Melbourne slow," said Shane Oliver, chief economist at AMP Capital.

"Rapid power cost increases and high debt are also not helping. All of which is driving low consumer confidence."

Gas and electricity prices rose by around 20 per cent on July 1, weighing on household budgets at a time when private debt has skyrocketed to 190 per cent of disposable income.

As a result, consumption growth so far has largely been driven by a tick up in population and a slowdown in the savings rate which is sitting at an 8.5 year low of 4.6 per cent.

Australians are also collectively taking a pay cut, according to analysis by Morgan Stanley, which shows average non-farm compensation shrank by 0.3 per cent in the June quarter.

And, average hourly earnings contracted for the first time since 1993.

Many economists believe gross domestic product (GDP) growth will probably fall short of the Reserve Bank of Australia's upbeat forecast of around three per cent a year over the next two years.

Data out on Wednesday showed Australia's A$1.7 trillion (S$1.836 trillion) economy expanded 1.8 per cent last quarter from a year ago.

"The slump in real household income growth and the weakening outlook for dwellings investment suggests to us that the RBA's GDP growth forecast is too optimistic," said Paul Dales, chief economist at Capital Economics.

"We believe 2.5 per cent will be nearer the mark, which will force the RBA to keep interest rates at 1.5 per cent until late 2019. That would be roughly a year later than the financial markets expect."

Neither was there much good news on the trade front with Australia's surplus on goods and services narrowing unexpectedly to A$460 million in July, almost half what analysts had forecast.

Export earnings fell 2.2 per cent to A$31.07 billion, led by falls in gold, iron ore and coal prices.

That was a surprise to many as commodity prices had started climbing in July after a couple of soft months.

Analysts noted miners often reported the prices they received with a considerable delay, so it was possible exports could be revised up once the ABS obtained the updated numbers.

Commodities have been on a tear of late, with a strong outlook. The RBA's commodity index, which mirrors Australia's export mix, jumped 7.8 per cent in August when using spot prices and was up over 25 per cent for the year.

Copper touched a three-year peak this week and gold a one-year top. The main futures contract for iron ore in China has surged 40 per cent since late June, a huge windfall to Australian miners' export earnings and profits.